If VM have previously settled the account, but then put on a file a default, they're processing inaccurate data. As a matter of course, you should complain to the ICO that VM have been processing inaccurate personal data, a direct breach of data protection laws. ICO won't sort out your complaint, they'll consider VM's performance in the light of other complaints they get and act accordingly.
You may also want to contact Citizens Advice - I'm certain there's relevant consumer protection law that applies here, in the context of a company saying an account is settled, and then reporting it to credit reference agencies as defaulted. As a short term measure you may want to add a Notice of Correction to your credit history with the three big credit reference agencies, although that doesn't address VM's bungling, just presents your side of the story.
In terms of how you and VM choose to settle this matter, make sure the company settle according to the level of inconvenience and distress that applies. Forum staff should be able to resolve this, if there's any difficulty with any aspect, then raise a formal complaint with VM in writing and by recorded post, see if that works (probably not) and if not then reject the VM resolution asking for a deadlock letter. With a deadlock letter you can take the matter to CISAS, the industry complaints adjudicator. You could alternatively use the Financial Ombudsman instead of CISAS, since this dispute is about accurate termination of a credit agreement and the provision of timely, accurate and relevant information to the customer and/or the wrongful reporting of a default.
I appreciate if you're mid-house purchase, then all of this complaining and escalation is time consuming and distracting, but it's an evil necessity when fighting the monolithic incompetence on display here.
